Thoughts from Dave Mead and discussion about issues and concerns for Small and Mid-size Businesses. Some discussion topics will include strategic planning and execution, improving profitability and cash flow, maximizing value for exit.

Wednesday, May 8, 2013

As we approach Mother’s Day, I am
preoccupied with thoughts about my mother. While Mom passed away over 10 years
ago, not a day goes by that I do not actively think about the lessons I learned
from her. While my mother was not a
business person, she was the best manager I ever met. While raising six children she was able to
maintain a myriad of interests – from potting and ceramics, to becoming a world-renowned
hybridizer of daylilies.

Here are some of the lessons in no
particular order – and if you knew my mother you’d know it certainly is not a
comprehensive list.

Always leave it better than you found
it - make a difference

Treat others the way you want to be
treated

Never ever give up

The Lord helps those who help
themselves

If you keep your mouth open long
enough, something unfortunate will come out

Do your best and, if you keep trying,
you’ll be the best

Do the important things first … and
the less important will take care of themselves

Tuesday, May 7, 2013

Chances are, if you are a business owner, you have never tried to
sell a business. Most business owners sell their business only once. However, those
who are in the merger and acquisitions business know the answer to this
question - everyone has had a transaction fall apart. Sometimes it's for good
reason. But many times, a delayed, discounted, or dead transaction is very
preventable with better seller preparation.

Has any of the following happened to your transactions?

1.Unrealistic (or changing) seller expectations of valuation. Many times sellers do not have an understanding of how valuations
are determined. Some look at sales of public companies many times larger than
their company; others may receive information from a peer in a different
industry; yet others look at revenue without consideration to EBITDA. A few are
“sold” by representatives that promise them high valuations in order to secure
their business. Going into a transaction with an unrealistic expectation of
valuation is a recipe for disappointment, equivocation, and failure.

2.Cold feet - Seller,
especially business owner, is not emotionally prepared to sell. Having sold a number of businesses, including being involved with six that I
either started or ran, I understand how difficult a decision to sell can be.
You’ve built this business, struggled and toiled alongside loyal employees,
investors, and managers – spent more time on the business than with your family.
And now, the decision to sell? Many business owners do not have a post-sale
plan and can be very apprehensive about “what’s next?” It is not unusual for a
business owner who is not emotionally prepared to sell, to change his or her
mind in the middle – or towards the end – of the sales process, incurring
significant costs, stress, and ill-will.

3.Selling company's performance deteriorates during the sales
process. Without
a doubt, performance erosion during the sales process is the single greatest
reason for price adjustments (discounts) or deals falling apart. As a CEO or
business owner, selling your business is like adding another full-time job. First-time
seller business owners always underestimate the time and
energy required to both sell the business as well as maintain the performance “promised”
to prospective buyers in your plan.

4."Stuff happens" - Surprises show up during due
diligence. Many business owners have developed
customer and supplier relationships on a handshake or fairly informally. While
these relationships may have existed for years, you can’t sell a business
without documentation. Sales and supplier contracts must be in place, Intellectual
property protected, key employees retained, shareholder and legal entity
information buttoned-up, etc. Surprises that show up during the process can
cause – at best- large amounts of the seller proceeds to be placed in escrow.
At worst, due diligence surprises result in price discounts, or in the buyer
deciding to walk away.

5.Failure to demonstrate a meaningful strategic growth opportunity
to the buyer. Buyers are buying an opportunity to get
a return on their investment. They are interested in the future, less about
your past. You need to develop and paint a compelling story about the future. A
thorough understanding of the opportunities, strategies, possible competitive responses,
risks, actions, etc., provide a buyer with enthusiasm about the likelihood of a
successful investment.

The business owner seller, while very knowledgeable about their
business, has little experience in selling a business. As mentioned, for most
sellers, it may occur only once in their lifetimes. As a result, they have a
lack of understanding of roles, motives, and behavior of the parties involved
with a transaction.

Seller's Advocate.Mead Consulting performs a role with our clients - as the business
owner seller's advocate. Our senior consultants have been through dozens and
dozens of transactions as both buyers and sellers. We understand the stress
involved for the seller. We help clients prepare for the process by working
with them in advance to add value by increasing Revenue and EBITDA,
strengthening management, working on pre-due diligence, and developing a
compelling strategic growth story. Additionally, we walk the business owner
through the process, educating them about various aspects of the transaction
and the roles of the players, so that there are fewer surprises for them. We
assist them in the selection of the appropriate team for their transaction
- investment bankers, lawyers, accountants (especially tax). During the sales
process we support the transaction team, leveraging the business owner's time,
and making certain that key milestones and steps are completed. We keep the
business owner and the management team focused on maintaining company
performance. When unexpected issues arise during negotiations, we can be a
trusted bridge with the business owners helping them see solutions rather than
obstacles.

Better advisors refer Mead
Consulting to prospective sellers as a Seller's Advocate.The better lawyers,
accountants, banks and investment banking professionals see the value that a
Seller's Advocate can have to make certain that a deal does not fall apart and
the seller maximizes value.

Since
many business owners may be unfamiliar with a Seller’s Advocate…..See what Business
owner sellers say about Mead Consulting in a Seller's Advocate role.

...We really underestimated what the sales
process would be like. Mead Consulting worked with us to prepare the
company, helped us with our planning and due diligence, management
presentation, coached us with presenting, and helped us navigate throughout the
process. ...Steve F, CEO, Financial Services Company

...We
missed the opportunity to sell our family business during the last upcycle.Mead Consulting helped us grow revenue and EBITDA
to record levels and guided us through the selection of a transaction team.
Dave Mead and his group provided great counsel throughout the sales process,
removing obstacles and firmly encouraging us to a great deal with a strategic
buyer that mirrored our family business values. ...Dan M, President, Building
Products Company

...We
could not have completed the sale of our business without the advice and
guidance of The Mead Consulting Group. Their experience was critical in helping
us prepare, and endure, the transaction process to a successful outcome.
...Charles M, President, Healthcare IT Company

...Thank
you to you and your team for helping us. You have that unique ability to
challenge people without coming across as judgmental or critical, and you
forced us to look at things differently. We would not have been able to get to
the next level without your help...Mike M, President, Business Services
company

...I do not know why anyone would attempt to sell
their business without Mead Consulting. They understand the challenges of
continuing to run the business while trying to sell it. Their experience kept
us focused on the right things and they helped keep our transaction team
well-aligned during the process. Making sure that it was the best deal for
me. ...Ron T, CEO, Software Business

The Mead Consulting
Group helps business owners navigate through a successful sales
process, including preparation, selection of the team (investment bankers,
transaction attorneys, tax counsel, etc.), and the sale process itself. We
focus on maximizing value and
leverage the business owner's and management's time so that they can focus on
maintaining business performance. Contact us for more
information.

Wednesday, May 1, 2013

[Editor's Note: Recently there has been much dialogue about the bankruptcy of Michael Porter's Monitor Group (See"What Killed Michael Porter's Monitor Group?" ) It has occurred to me that the downfall of this firm was not flawed strategy, but not only a failure to understand and respond to customer needs, but also perhaps even an arrogance about the importance of customers. It brought to mind an earlier article on the importance of meeting individual customers' needs. I hope you find it useful. - DPM]

DIFFERENTIATING CUSTOMER SERVICE: GIVING EACH CUSTOMER WHAT THEY NEED CAN LEAD TO GREATER PROFITS¹

What do you do when you're waiting for a slow elevator?

A number of years ago, a company that had just built a major building realized their elevators were intolerably slow. What to do? It was too expensive to reengineer the elevators. After thinking about the problem for a while, mirrors were installed in the lobby and elevators. It turns out that people will tolerate a much longer wait if they can see themselves in a mirror.

Today, most tall buildings have mirrors or polished metal surfaces in their lobbies and elevators.

Disney World has a similar problem. The waiting lines for attractions are often very long, and children are impatient. So are adults. The customer service group at Disney studied this problem at great length, and made the field into a science. They now know exactly how long people will wait before they need to be distracted. Consequently, when you queue up for Pirates of the Caribbean or other top attractions, you are likely to be engaged at carefully predetermined intervals by wandering characters, videos, and mirrors. Also, lines are laid out in a serpentine manner, providing a feeling of constant progress. Recently Disney announced the MyMagic+ program offering advance reservations and providing waiting customers with "buzzers" that will notify them when the ride is ready - notify them at one of the restaurants, no less.

Here's how one top hotel, which differentiates itself through its reputation for great service, handles customer service. Every employee is empowered to spend up to a few hundred dollars without approvals to rectify customer service errors. If laundry is late, it arrives with a bottle of wine. In this way, the hotel turns lemons into lemonade. By the way, Southwest Airlines has a similar policy. The front-line employees are empowered to "bend the rules" to meet customer needs. It is no coincidence that Southwest is perceived as one of the leading airlines in customer service, even though it is a low-fare carrier.

When you do a good job of fixing a customer service problem, you often earn more customer loyalty than if there had been no problem. This is when you can show your worth, and earn your customer's trust.

What is customer service? Perception is Reality!This raises a critical question: Exactly what is customer service? Nearly every company has numerous customer service measures, but how many of these really produce the right results?

Is customer service what the customer experiences? Not exactly. Customer service is what the customer perceives and remembers. The acid test of customer service is the customer's future behavior. If Disney World had managed to shorten its wait time by 20 percent, but had no distractions, customer service complaints would have gone through the roof.

Consider the following customer service measure. A copier company has a policy that when a customer calls for repairs, a repair tech will arrive on the scene in two hours, 95 percent of the time. Sound good? Think about the following issues.

This policy treats all service calls the same. Some service calls are prompted by machine failure, while others may be caused by cosmetic issues, like a loose faceplate. The policy also treats all customers and customer situations the same. One call might be for a non-functional machine that happens to be the only copier on the executive floor of a major account, while another call might be for one of the eight copiers in the company's administrative department.

Customers' negative perception of service is primarily formed by their worst experiences, not by the average. For example, even if the copier company fully met the policy above, the disappointed 5 percent would have far different reactions if the wait time were four days, rather than two hours, ten minutes. Moreover, the policy focuses on when a service tech arrives, not on when the problem is fixed.

This policy reflects the cardinal error of customer service: It measures what the copier company sees, not what the customer sees. It's an operational measure, not a customer measure.

Product reliability. As you get better, the customer sees you as being worse.Think about this one. The smart phone company develops a great quality process, and its smart phones become very reliable. What's the impact on customer service? The answer is counterintuitive. As the products become more reliable, the easy-to-fix problems go away. Those that remain are the most intractable ones, those that take the most time and are most difficult to fix. When customers focus on their bad experiences, they often perceive that customer service has degraded.

What can you do about this? Several things.

·First, shape your customer's perception. Some companies issue report cards showing their actual service. In this context, the occasional problems are seen to be just that, occasional problems.

·Second, get in front of the problem. Some companies have carefully analyzed the key points at which preventative maintenance makes a big difference. Others have designed machines with the capability for self-diagnosis. Some of these machines even have the capability to call for service, without human intervention, when they "sense" an impending problem.

· Third, make the products easier to fix. Most often, the root problem behind lengthy repairs is lack of quick access to needed parts. One manufacturing client company, for example, created what they called a "wall of washers." They saw that their product design engineers were specifying unique washers for each of their products. This caused huge problems in keeping local spare parts inventories, and resulted in big delays in field repairs. To emphasize the point, one clever vice president had his staff collect every unique washer and paste them on a wall. There were over 1,000. The vice president brought the product design engineers to see the wall of washers. As a result, the engineers quickly began to redesign products to have a maximum number of common parts. The impact on service intervals, the time between when a customer calls and when the machine is fixed, was striking. And, inventory costs dropped through the floor.

Product availabilityMeasuring customer service is a common problem in distribution and retail. Many locations have thousands of products, and it is costly and difficult to keep them all in stock. In addition, sometimes products are present in the retail store, but not in their proper place on the store shelf. What's the right measure of product availability?

The answer is more complicated than simply whether the shelf is empty. A lot depends on the customer's need.

For example, in many retail situations, customers come into the store with a generic need such as a tape measure, a plastic container, or an inexpensive television. For these situations, most stores carry two to four products that would fit the customer's need, and the customer is largely indifferent. In this context, if one product is missing from the shelf, the customer is still perfectly satisfied.

Therefore, in these cases, the proper measure is a "substitution group." For most retailers or distributors, over 60 percent of their sales engagements fit this customer behavior profile. Yet most retailers and distributors focus on product-specific availability measures of customer service, and this causes huge inventory costs. .

The hospital industry presents another sort of customer service misunderstanding. In a typical hospital, the definition of an out-of-stock situation is one in which at least one ward and the stockroom both run out of a particular product. Yet the hospital may have a large amount of the product scattered on other wards. The problem is lack of a mechanism to locate the product once it leaves the stockroom.

This creates an important opportunity for a supplier to install a vendor-managed inventory system that includes both stockroom and wards. Here, the vendor gains great efficiencies from reducing safety stock by cross-sourcing from ward to ward. In fact, this is one of the major hidden benefits of vendor-managed inventory.

In earlier eLetters we have written about the importance of differentiating between customers. Customer service differentiation is the key to getting out of the vicious cycle of building inventories because service is poor, then cutting inventories because costs are high, then building inventories again because service is poor again....

The key is to understand that great customer service means keeping your promises to customers, but that these promises, the service intervals or order cycles, can and should be different from customer to customer and product to product. For nearly all customers, the most important need is to get what they plan on and expect. This is much more important than the cycle time, per se.

Many leading companies are moving beyond tactical definitions of customer service to find powerful ways to make their customers more profitable. Customer service is the starting point and ending point for any effective account relationship. The key to success is clear thinking about what it feels like to walk in the customer's shoes.

Welcome to Mead's Issues for Growth

Since 1991, we have been publishing a periodic eLetter "Issues for Growth" that contains articles or thoughts of interest to business owners looking to grow and improve their businesses. We invite your comments and discussion.

About Me

We have been consulting with small and mid-size businesses for over 30 years, helping companies move to the "next level of success" by focusing on strategies that the company can execute well and aligning all activities within the company to those key strategies.
I have started and run 7 companies - a couple of great successes, a few moderate successes, a couple of screaming failures.